Moody’s Investers Service: Supply constraints underpin increase in CPO prices

On November 17, Malaysian Palm Oil Board (MPOB) data showed that daily CPO prices rose above RM3,500 per tonne for the second straight day, to the highest level since April 2012. — Picture by Yusof Mat Isa

KUALA LUMPUR, Nov 20 — Moody’s Investors Service expects tighter supply to support crude palm oil (CPO) prices in the coming 12 months, raising its medium-term price sensitivity range for CPO to RM2,200-RM2,600 per tonne with a midpoint of RM2,400 per tonne.

The report said this is around 14 per cent higher than the RM2,100 per tonne midpoint of its previous price range of RM1,900 to RM2,300 per tonne.

“While CPO prices will likely remain above our revised price range in the coming months because of continued supply constraints, average CPO prices over the last five to 10 years of RM2,400 to RM2,500 per tonne suggest that the current high of around RM3,500 per tonne is unlikely to be sustained,” it said.

It said the CPO price averaged around RM2,600 per tonne for the 10 months through October 2020, 30 per cent higher than around RM2,000 per tonne during the same period in 2019.

On November 17, Malaysian Palm Oil Board (MPOB) data showed that daily CPO prices rose above RM3,500 per tonne for the second straight day, to the highest level since April 2012.

It said CPO prices have risen considerably this year amid supply constraints and labour shortages because of movement restrictions.

Meanwhile, the report states that a decline in production yields due to dry weather earlier this year and reduced fertiliser application by producers in the past during low CPO prices have weakened CPO supply.

The Asean Specialised Meteorological Centre forecasts that La Nina conditions, which can cause higher-than-average rainfall over South-east Asia, will continue through to March 2021. 

 “The phenomenon could disrupt palm oil production in Malaysia and Indonesia, which account for around 85 per cent of global CPO production,” it added.

Despite the potential earnings benefit from high CPO prices, palm oil companies’ credit quality remains susceptible to slowing economic growth, which could hurt palm oil consumption, and operational disruptions from the pandemic.

Palm oil exports from Malaysia (the second-largest palm oil producer) declined eight per cent year-on-year for the 10 months ended October 2020, while exports from Indonesia (the largest palm oil producer) declined 11 per cent year-on-year for the eight months ended August 2020. — Bernama